|
March 20, 1998
The week started out well, with mortgages at their 7.125% post-Christmas lows, and bonds in the 5.80s on news that oil prices had fallen below $14/bbl.
The rest of the week wasn't bad, but rates gradually gave up the lows, as bonds suffered from more news of a strengthening economy. In particular, January Housing starts raced to a 6% gain: a 1.6-million-unit-per-year record.
The trade deficit rose to $12 billion, but China and Japan accounted for three-quarters of it, just as they have for the last four years; and the overplayed Asian crisis added a billion, maximum, to the total. An annual deficit in the $150-billion range is not a big deal in an $8 trillion economy, and there is no sign whatever of the $200-250 billion Asian explosion.
Last week I mentioned that a big drop in oil prices had the same economic effect as a big tax cut. This drop is a Mazola party of epic proportions.
The benchmark for crude oil prices is West Texas Intermediate (many others are quoted: Brent North Sea, Saudi LightŠ but WTI is the benchmark), set its 12-month high early last year at $22.78/bbl. On Tuesday, WTI hit a 12-year low in nominal (1998-dollar) terms at $13.21/bbl -- a 42% drop in price.
In constant dollars, oil has completely unraveled the 1973-1980 OPEC price hikes.
Examples. As 1980 dollars were worth almost exactly twice as much as today's dollar, the 1980, $38/bbl OPEC price would today be $76/bbl. Thirteen bucks is cheap.
Dollars in 1972 were worth almost exactly four times today's minibuck. So, today's $13.21/bbl is the same as $3.30/bbl in '72 dollars -- just about the price of crude before the first gas lines. Seriously cheap.
In an unfortunate accident -- unfair, really -- the March Scientific American, delivered to newsstands four weeks ago, ahead of the recent oil price plunge, carries this headline:
"The End Of Cheap Oil"
The extreme-shortage-by-2010-argument by the petroleum geologist-authors is probably overstated, just as were the same sorts of graphs in the 1970's. Straight-line consumption versus declining supply always makes it look as though we're going to run out of oil altogether; and is always wrong, as rising prices cut demand and make expensive recovery and exploration economically feasible.
However -- no gloom-and-doom, you understand -- when OPEC clears up this little oversupply disagreement, what happens when oil doubles back to $25/bbl? A slowing influence on the economy, sure; but, what might that doubling do to inflation? And to interest rates?
Let alone to subscriptions to Scientific American.
|
